LKQ collides with Huizenga curse as margins dent

Billionaire entrepreneur Wayne Huizenga is renowned for a buy-and-build strategy that demolishes rivals.

The so-called Huizenga playbook created multibillion-dollar giants like Waste Management, Blockbuster and AutoNation.

But the rapid roll-up strategy employed by the 76-year-old businessman and a handful of pals over the last 45 years has also led to several accounting scandals, billions of dollars in shareholder losses and even bankruptcies.

LKQ, a 16-year-old Chicago-based junkyard auto-parts giant, is the latest company run by Huizenga protégés to take pages out of that playbook. And it is starting to show some of the same wear and tear of earlier ventures associated with the group, critics say.

"Caught in a massive margin squeeze with used auto-parts prices deflating, and salvage vehicles rising, LKQ's gross margins have been in persistent decline since 2005," wrote short-sellers Ben Axler and Eiad Asbahi in a Jan. 14 report by Prescience Point Research Group.

The short-sellers believe that LKQ's inventory is full of overpriced parts that aren't selling.

A front door for a 2007 Honda Accord costs anywhere from $670 to $755 at Nevada LKQ dealers, compared with $400 to $500 from other dealers in that state, according to car-part.com.

The junk auto-parts company dismissed the report as "full of numerous inaccuracies" but did not elaborate or return calls for additional comment.

LKQ, which has acquired over 170 companies, has seen gross margins steadily shrink from 45.3 percent in 2009 to 41 percent last year, according to regulatory filings.

At the same time, the cost of goods sold — the salvaged car hulks that it uses for parts — has been steadily rising, to 59 percent of revenue in 2013, from 54.7 percent in 2009, filings show.

Until recently, investors seemed more taken by the company's fast-growing top line than the increasing margin pressure as LKQ shares more than quadrupled over that same four-year span, from $7.62 in May 2009, to $34.32 in December 2013.

But LKQ shares have fallen 17 percent since that December high, as some of the underlying weaknesses obscured by the roll-up strategy are starting to surface.

Last week William Blair cut its first-quarter earnings estimate for LKQ by 8 percent, to 33 cents, in part due to a hike in used car prices. LKQ reports April 29.

This isn't the first time Huizenga — a college dropout worth an estimated $3.4 billion — and his cronies have come under attack for big consolidations that later crashed and burned, including:

•  Waste Management: Four executives settled Securities and Exchange accounting fraud charges for about $30.87 million in 2005.
• Blockbuster: Went bankrupt years after Huizenga sold it to Viacom for $8.4 billion in 1994.
• AutoNation: Shareholders lost more than $10 billion before founder and then-CEO Huizenga exited in 1999, and new owners engineered a turnaround.
• Swisher Hygiene: Huizenga took over in 2004. It now faces an SEC inquiry over accounting irregularities. In 2013, Huizenga resigned from its board.

Huizenga declined to comment on the report's allegations.

LKQ was formed in 1998, when the accounting troubles at Waste Management, which Huizenga had already left, were just surfacing. The company's CFO, Huizenga pal Donald Flynn, began looking for his next act and founded LKQ.

Huizenga helped out Flynn (who died in 2011) with an investment from AutoNation. Another investor was Waste Management CEO Dean Buntrock — the man the SEC called the driving force of its accounting fraud. Seven former Waste Management execs went to work at the company.

LKQ stands for "like, kind and quality," a term used to designate the type of aftermarket recycled or refurbished replacement parts acceptable to insurers in auto claims.

The company's original owners began cashing out after LKQ went public in 2003, when insiders owned 22 percent of the shares. They now own less than 2 percent.

LKQ originally undercut on price, its primary competitive advantage in the salvage and aftermarket auto parts business. As insurers cut back on what they would pay auto-body shops for repair parts, LKQ's business flourished.

But in recent years, General Motors and Mazda started programs to match LKQ's prices, Prescience Point research showed.

Pending state auto insurance legislation, in Michigan and Rhode Island, could put even more pressure on that market, since it would not allow insurers to demand alternative parts in car repairs.

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